Investment Holding Company EXOR Outlook Revised To Stable On Restored Loan To Value #BBB+/A-2# Ratings Affirmed

Stocks and Financial Services Press Releases Friday April 28, 2017 17:11
PARIS--28 Apr--S&P Global Ratings
PARIS (S&P Global Ratings) April 28, 2017--S&P Global Ratings said today that it has revised its outlook on The Netherlands-based investment holding company EXOR N.V. to stable from negative.
At the same time, we affirmed our 'BBB+/A-2' long- and short-term corporate credit ratings on EXOR and our 'BBB+' issue ratings on the company's senior unsecured notes.

The outlook revision stems from EXOR's ability to restore its loan to value (LTV) ratio to just below 20% at year-end 2016 from more than 28% in March 2016. Moreover, we consider that this ratio can improve further by June 2017 if proceeds from the redemption of third-party fund Black Ant (currently valued at €355 million) are allocated to debt repayment.

Upon closing of EXOR's $6.7 billion debt-funded acquisition of reinsurance company ParnterRE in March 2016, the company's LTV ratio peaked at more than 28%. Since then, management has divested broadly $1 billion of assets (spanning from its real estate asset Almacantar to financial assets), thereby gradually deleveraging the group's balance sheet, with debt reaching approximately $3.8 billion by year-end 2016. These efforts, combined with better trading performance of listed assets contributed to the LTV progressively lowering to about 19.8% at year-end 2016; for example, the share price of auto original equipment manufacturer (OEM) Fiat Chrysler Automobiles (FCA) rose 50% between October 2016 and December 2016. In the ensuing months, EXOR's portfolio market value gained further momentum, reaching about $21 billion as of April 26 2017, leading to an LTV ratio of 18%, which is lower than our 20% threshold for the current ratings.

We think ongoing competitive pressures battering the global property/casualty reinsurance sector, softening of U.S. auto demand, and highly competitive conditions in the agricultural OEM market could indirectly take a toll on EXOR's investment portfolio market value. That said, we consider the company should gain some limited leeway after the redemption of the third-party fund Black Ant. As per our calculations, on April 26, 2017, pro forma the Black Ant redemption, a sharp 20% reduction in EXOR's current portfolio value would increase the LTV ratio to more than 20%.

We continue to think that since PartnerRE's integration into EXOR, EXOR's business risk profile has migrated to the lower end of our satisfactory category. It remains supported by improved asset credit quality, given PartnerRE's credit profile, which is comfortably in the investment-grade category and more than offsets the weaker creditworthiness of the remaining portfolio that we assess on average in the 'bb' category.

Conversely, EXOR's business risk profile is constrained by reduced asset liquidity, with the share of listed assets falling to about 60% from more than 80% before the PartnerRE acquisition. That acquisition provides partial liquidity, with approximately $700 million of PartnerRE's preferred shares still listed on the New York Stock Exchange. In our view, the sector and geographic diversity benefits of the acquisition are offset by PartnerRE's dominant position in the portfolio, representing just below 40%.

Our view of EXOR's financial risk profile remains unchanged, given the track record of a conservative financial policy paired with management's proven commitment to reduce the LTV to below 20%. This notwithstanding, we consider that the company displays a somewhat greater risk tolerance than in the past, when the LTV did not exceed 14% even during equity market turbulence.

Following the strategic acquisition of PartnerRE, which necessitated the divestment of its sizable financial investment portfolio, EXOR has, in our view, eroded most of its previous flexibility under the ratings. As a consequence, we expect new investments will be entirely prefunded through asset rotation and/or excess cash flow, after the debt repayment.

The stable outlook reflects our view that EXOR can maintain an LTV ratio below 20% in 2017 and 2018. Given its limited financial flexibility resulting from the significant acquisition of PartnerRE, we would expect management will keep demonstrating its commitment to the 20% LTV threshold required for the current ratings.

In our view, given the current portfolio characteristics, ratings upside is limited. We think it could materialize in the future if the percentage in liquid assets materially increases, all other factors remaining unchanged. Improved portfolio liquidity, combined with further substantial and sustainable improvements in the operations of FCA and CNH Industrial, assuming no deterioration in PartnerRE's creditworthiness, could prompt a positive rating action.

Ratings pressure could come from an LTV ratio exceeding 20% and/or from strain on EXOR's portfolio asset liquidity for a sustained period. Deterioration of PartnerRE or unsupportive operating conditions for FCA and CNH could also trigger a negative rating action.

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